Capital Opportunities for Small Businesses - sbtdc

C A P I T A L O P P O R T U N I T I E S F O R SMA L L B U S I N E S S E S
ultimately responsible for any shortfall. In a non-recourse situation, the factor takes on all the rights and
obligations of the receivable, including the risk of default by the customer.
Factors charge a fee that is usually 2 to 6 percent of the receivable. The calculation of this fee depends on the
following variables: volume, size, and number of invoices; customers’ credit; location of the customers; and
length of time of payment. Some companies charge an additional fee if the customer is late on payment, while
others have one flat rate. Upon payment by the customer, the remaining value (10 to 30 percent), minus the
fee, is sent to the business.
There are two methods of factoring, called traditional and spot. With traditional factoring, the finance company
obtains the rights to an entire stream of receivables. This is best for companies with at least $1 million in annual
sales. Spot factoring is the buying and selling of a single or small number of businesses accounts. Businesses
that only use factoring for a limited time or purpose, such as seasonal employers, often prefer the spot factoring
method.
In addition to traditional factoring companies, The Receivables Exchange (www.receivablesexchange.com)
allows companies to post and sell their invoices online, where buyers compete by bidding for invoices. While a
business can receive cash quickly, it may be expensive, and typically works best for larger most established
businesses.
It is important to keep in mind that, unlike banking, there are no regulatory agencies overseeing the business
practices of factoring companies. Most factors will provide prospective clients with a list of former and current
clients as well as references from local lending institutions.
27